By Kim Jae-kyoung
Staff Reporter

Despite bold restructuring since the 1997 financial crisis, domestic banks still lag far behind American lenders in financial soundness.

According to the Bank of Korea (BOK), the average non-performing loan (NPL) coverage ratio at local banks stood at 103.7 percent in 2002, up from 85.2 percent in 2001 and 81.8 percent in 2000.

But the figure is well below the United States’ 127.2 percent in 2002, 131.7 percent in 2001 and 149.4 percent in 2000. A bank’s NPL ratio is calculated by dividing loan-loss reserves by NPLs.

The central bank pointed out that in order to improve financial soundness, local banks should maintain the coverage ratio at the U.S. banks’ average level of 130 percent.

In 2002, JP Morgan Chase posted a NPL coverage ratio of 181.3 percent, followed by Bank of America with 152.6 percent and UBS with 138.6 percent.

``U.S. commercial banks set aside loan-loss provisions in a much more conservative manner than Korean banks,’’ BOK economist Chung Ho-sung said.

``U.S. banks strictly reflect borrowers’ capability of future cash flows and the past history before piling up the reserves,’’ he added.

In addition, domestic banks have reduced their bad loan ratios, but they are still well above their U.S. counterparts’.

The problem loan ratio at local banks fell to 2.43 percent in 2002, compared with 1.46 percent in the U.S. Japan’s bad loan ratio was 8.4 percent.

South Korea’s bad loan ratio increased to 7.35 percent in 1998 and 13.59 percent in 1999 following the currency crisis. But, since then it has declined to 8.85 percent in 2000 and 3.33 percent in 2001.

The central bank said that since the financial crisis, most banks were engrossed in expanding consumer loans, considered safer than corporate lending, which made them more vulnerable to external shocks.

``Domestic banks need to focus more on enhancing credit risk management as both corporate and consumer loans run the risk of becoming bad assets due to a prolonged economic downturn,’’ Chung said.

Despite a rise in loan-loss reserves, the NPL coverage ratio at local banks declined in the first half due to soaring NPLs caused by banks’ poor credit risk management.

According to the Korea Institute of Finance (KIF), the coverage ratio at Woori Bank decreased from 114.8 percent in December to 86.4 percent in June, Shinhan’s from 99.8 percent to 74.5 percent, Hana’s from 95.1 percent to 76.6 percent and Kookmin’s from 65.4 percent to 59.4 percent.

``The poor risk management had local banks pile up more loan-loss provisions, thus hurting their profitability,’’ a KIF economist said.

Meanwhile, total assets at 14 local banks _ commercial and regional _ reached 636.5 trillion won in 2002, up 54.5 percent.

They sold off a total of 52.65 trillion won worth of insolvent assets to the Korea Asset Management Corp. during the 1997-2002 period, while writing off 33.94 trillion won in bad loans.